According to Bloomberg:
Berkshire Hathaway Inc. has hired Todd Combs of Castle Point Capital to manage a “significant portion” of the investment portfolio built by Chairman Warren Buffett.
Combs, 39, issued a letter to partners of Castle Point announcing his decision, Omaha, Nebraska-based Berkshire said today in a statement distributed by Business Wire.
For three years, Vice Chairman Charles Munger and I “have been looking for someone of Todd’s caliber to handle a significant portion of Berkshire’s investment portfolio,” Buffett said in the statement. “We are delighted that Todd will be joining us.”
Buffett Names Castle Point’s Combs to Investment Post (Bloomberg)
Overall, I think that this decision makes a lot of sense. If you look at Berkshire over the course of its history, one of the common trends is a tendency to invest in financials. I’ve often wondered why this is but can speculate that it’s because insurance companies and banks tend to have recurring earnings and the threat of technological obsolescence is pretty low.
So who exactly is Todd Combs?
Combs (39 years old) runs Castle Point Capital, a long/short equity hedge fund focused exclusively on the financial services sector. Formed in 2005, the fund is based in Greenwich, Connecticut. Trident III provided the hedge fund’s seed capital in November 2005.
Here’s what Buffett has to say about Combs:
Buffett described Combs as an “all-American type” who is not the least bit interested in publicity, an attitude unlikely to shield him from it. Now a resident of Darien, Conn., Combs is by birth a Floridian who graduated in 1993 from Florida State University with majors in finance and multinational business operations.
Once out of school he worked for Florida’s comptroller and later moved to Progressive Insurance, where he was involved in the all-important activity of setting automobile insurance rates. Progressive is an arch-competitor of Berkshire’s GEICO.
…Buffett describes Combs’ record through the financial crisis as “pretty good.” Combs’ hiring, in fact, clearly indicates that Combs has had a performance with which Buffett is satisfied.
Meet the leading contender to manage Berkshire’s billions (Fortune)
Performance-wise, Todd Combs looks like a sharp financials investor. According to Bloomberg Castle Point’s fund gained 6.2 percent last year, fell 5.7 percent in 2008, rose 19 percent in 2007 and climbed 13.6 percent in 2006. If you look back over the same period, most financials-focused funds have not had that level of performance. Most took a beating back in 2007 and 2008 and have returns that are closer to the S&P over the same period, if not lower (about -5%).
One of the things I wondered about, back when Li Lu was discussed as a potential CIO candidate (he has since taken his name out of the running) was whether the penchant for betting big and winning huge would be an applicable strategy for Berkshire Hathaway. It’s a practice preached by Charlie Munger, but if you look out at what Buffett has done over the last 30 years, the only big bets have come via the form of acquisitions.
Some of the best plays from Berkshire’s investment portfolio have come from the preferred deals during the financial crisis and the convertible deals back in the 1987 bear market. In both cases, the investment returns had fixed-income properties, returns were capped for the most part, even though he could convert to equity or exercise warrants. These were mostly bets on survival, not on the overall ability for companies to thrive after crisis periods. An investor could have earned a much higher rate of return by purchasing common stocks near their all time lows during either period (similar to David Tepper), but it’s a strategy that Buffett did not pursue. I think that’s pretty telling.
Looking back at Todd Combs’ portfolio, we can see that he was not trying to bet big on any particular direction for financials. He was not doing a Michael Burry/Steve Eisman short the market and make 500% play. I think that is a quality that Buffett was looking for, someone who would perform well but not bet big. Maybe that’s due to the unpredictable nature of financial markets or maybe it’s because he wants the investment side of Berkshire to take a back seat to the operating businesses when he’s no longer around.
Some people have questioned whether investing in Todd Combs, someone with a short track record, makes any sense. To me, the fact that Combs performed so well during a period when most financials investors have gotten crushed is pretty telling. It’s not like we were looking at 5 years of performance during a bull market. So even though 5 years is typically too short of a short timespan, in this case I believe it’s enough to discern whether or not someone is a good investor.
You can view Todd Combs’ top 10 portfolio positions here:
For a full look at his Castle Point Capital portfolio, click this link, to view a google docs spreadsheet with his entire list of positions as of the latest 13F-HR.
Or, view his portfolio embedded in the iFrame below: